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Jay Powell has warned that inflation “remains too high”, raising the prospect of further interest rate increases should price pressures persist.
In a highly anticipated speech on Friday, the chair of the US Federal Reserve struck a hawkish tone at times, referring to the central bank’s readiness to maintain a “restrictive” policy to bring inflation down to its 2 per cent target.
But he also promised to proceed with future decisions “carefully” as the Fed navigates the final stages of its campaign to stamp out the worst inflation shock in decades.
“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said at the Fed’s annual economic symposium in Jackson Hole, Wyoming.
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” he added.
He also pledged the central bank would “proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data”.
Headline US inflation, according to the consumer price index, was 3.2 per cent for July, well down on its peak of 9.1 per cent, but above June’s rate of 3 per cent.
Powell maintained that the Fed was now focused not only on the risk of tightening monetary policy too little — so allowing inflation to become entrenched — but also of raising rates too high.
“Doing too much could also do unnecessary harm to the economy,” he said.
The yield on the interest rate policy-sensitive two-year bond rose 0.07 percentage points to 5.091 per cent in the aftermath of his comments, while the benchmark 10-year US Treasury was up 0.03 percentage points at 4.27 per cent.
Equities also gave up early gains in New York, with the S&P 500 stock market down 0.2 per cent and the Nasdaq Composite 0.3 per cent lower.
Since March 2022, the Fed has lifted its benchmark policy rate from near zero to a range of 5.25 per cent to 5.5 per cent, a level that Powell on Friday described as “restrictive, putting downward pressure on economic activity, hiring, and inflation”.
While Powell said the full effects of past rate rises had not yet materialised and probably mean “significant further drag in the pipeline”, he signalled that the Fed was focused on the upside risk to inflation.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” he said, adding that “there is substantial further ground to cover to get back to price stability”.
The Fed faces a difficult task in the coming months to first determine whether officials need to raise the benchmark policy rate beyond its current 22-year high. It then must decide how long to keep rates elevated before considering any cuts.
The central bank is widely expected to forgo another rise in interest rates at its next policy meeting in September. Some market participants are anticipating a final quarter-point increase at the Fed’s meeting in late October. Rate cuts are not expected until well into 2024.
Powell reiterated that getting inflation back down to its target would require not only a period of “below-trend economic growth” but also “some softening in labour market conditions”.
His comments echoed a message he sent at last year’s Jackson Hole symposium when he said the Fed was determined to “keep at it until the job is done”.
Powell’s warning on Friday comes at a fraught moment for financial markets, which have recently struggled to digest a recent surge in US borrowing costs. Once adjusted for inflation, the “real” yield on the 10-year Treasury note now hovers at its highest point in more than a decade. Mortgage rates have also soared.
While the debate about more immediate policy actions appears far from settled, officials are more unified in their view that getting inflation back to 2 per cent will be a slow process that will probably require the central bank keeping its benchmark rate higher for a longer period.
Economists say such a “higher-for-longer” approach is reinforced by the likelihood that the so-called neutral rate of interest, or R-star — a level that neither stimulates nor suppresses growth — is higher than in the past.
Many economists reckon that stronger-than-expected growth, swelling government deficits and ramped-up investment in domestic manufacturing and green technology have pushed up borrowing costs on a sustained basis.
Powell did not discuss the prospects of a higher R-star on Friday, but said: “We cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”
Additional reporting by Philip Stafford
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